2016 (6) TMI 249 - AT - Income Tax

Revenue appeal dismissed as Tribunal upholds CIT(A)'s decisions on turnover filter & working capital adjustment.

The appeal filed by the Revenue was dismissed. The Tribunal upheld the CIT(A)'s decisions on both the turnover filter and working capital adjustment, ... Transfer pricing adjustment - turnover filter application - Held that:- CIT(A) directed the TPO to adopt the turnover filter of ₹ 1 crore to ₹ 100 crores. Further, the submission of the Ld. Counsel for the assessee that in the subsequent year the turnover filter criteria of ₹ 1 crore to ₹ 100 crores shown by the assessee has been accepted by the TPO and the DRP could not be controverted by the Ld. Departmental Representative. Further, we do not find any merit in the grounds raised by the revenue regarding certain observations of the CIT(A). Under these circumstances, we do not find any infirmity in the order of the CIT(A) on this issue - Decided against revenue Working capital adjustment - Held that:- Since the CIT(A) has directed the AO to grant working capital adjustment to the assessee on the basis of average credit/debit period for the year and commercial rate of interest and since working capital adjustment has been allowed to the assessee by the TPO in A.Y. 2009-10 and 2010-11, therefore, we do not find any infirmity in the order of the CIT(A) directing the TPO to grant working capital adjustment on the basis of certain calculation - Decided against revenue Issues Involved:1. Grounds of Appeal No. 1, 7, and 8 - General in Nature.2. Grounds of Appeal No. 2, 3, and 4 - Turnover Filter Applied by TPO.3. Grounds of Appeal No. 5 and 6 - Working Capital Adjustment.Issue-wise Detailed Analysis:1. Grounds of Appeal No. 1, 7, and 8 - General in Nature:The Tribunal dismissed these grounds as they were general in nature and did not require specific adjudication.2. Grounds of Appeal No. 2, 3, and 4 - Turnover Filter Applied by TPO:The Revenue contended that the CIT(A) erred in observing that the TPO’s action of changing the Turnover Filter was without basis. The CIT(A) had accepted the assessee’s contention that the TPO did not afford an opportunity of being heard before concluding with his set of comparables based on a certain turnover criterion. The CIT(A) also did not appreciate that out of the set of 42 comparables identified by the assessee, only those with a turnover of less than Rs. 1 crore were to be rejected.Facts of the Case:The assessee, a subsidiary of Starent Networks Corporation, USA, engaged in software development services, filed its return showing a total income of Rs. 18,42,018/-. The TPO noted that the assessee had adopted the cost-plus method for benchmarking its international transactions and identified 42 companies as comparables. The TPO was not satisfied with the TP study report and applied a turnover filter of Rs. 1 crore to Rs. 20 crores, proposing a new set of comparables.CIT(A) Decision:The CIT(A) found no discussion in the TPO’s order justifying the change in the turnover filter and directed the AO to apply a turnover filter of Rs. 1 crore to Rs. 100 crores, following the Tribunal’s decision in the case of Genisys Integrating Systems (India) Pvt. Ltd.Tribunal’s Analysis:The Tribunal noted that the TPO applied the turnover filter of Rs. 1 crore to Rs. 20 crores without valid reasons. The Tribunal referred to the case of M/s. Genesis Integrating Systems India Pvt. Ltd., where it was held that companies with a turnover of Rs. 1 crore to Rs. 200 crores should be considered for TP study. The Tribunal upheld the CIT(A)’s decision to apply the turnover filter of Rs. 1 crore to Rs. 100 crores and dismissed the Revenue’s grounds.3. Grounds of Appeal No. 5 and 6 - Working Capital Adjustment:The Revenue argued that the CIT(A) erred in allowing working capital adjustment to the profit level indicator of the comparables without demonstrating that the pricing of the product and services was determined based on working capital.Facts of the Case:The assessee requested working capital adjustment before the CIT(A), which was not raised before the TPO. The CIT(A) admitted the ground and allowed the adjustment, relying on various decisions and the OECD guidelines.CIT(A) Decision:The CIT(A) directed the AO to grant working capital adjustment based on the average credit/debit period for the year and the commercial rate of interest.Tribunal’s Analysis:The Tribunal found no infirmity in the CIT(A)’s order. It noted that the assessee is entitled to working capital adjustment for computing profit margins of transactions, as consistently held by Coordinate Benches of the Tribunal. The Tribunal referred to its decision in the assessee’s own case for A.Y. 2007-08, where it restored the issue to the file of the DRP for fresh adjudication. The Tribunal upheld the CIT(A)’s direction to grant working capital adjustment and dismissed the Revenue’s grounds.Conclusion:The appeal filed by the Revenue was dismissed. The Tribunal upheld the CIT(A)’s decisions on both the turnover filter and working capital adjustment, finding no infirmity in the orders. The Tribunal emphasized the importance of valid reasoning and consistency in applying filters and adjustments in transfer pricing cases.